Cover Story: Remains of the day

As western lenders pull back from markets once deemed vital to their future growth prospects, Latin America’s home-grown banks are swooping in to pick up the pieces

By Elliot Wilson

When speculation first emerged in August that troubled
lender Royal Bank of Scotland was seeking to sell a highly
prized US asset, Citizens Financial Group, heads nodded
sagely.

The deal, priced at $16 billion by the British media outlets
that broke the story, made good sense. It would allow the
London-based bank, once a global giant, now hobbled and
humbled, to redeem a portion of the UK
government’s 82% stake.

RBS downplayed the rumors: its chief executive Stephen
Hester insisted that Citizens remained one of the
bank’s core assets. But analysts thought the sale
would prove a boon for RBS: unloading the asset would give the
UK lender a big, quick capital fix at a time when new
regulations are forcing European banks to boost their cash
reserves.

Yet curiously, one aspect of the story that was underplayed
and even overlooked was Citizens’ most likely new
owner: the Brazilian banking group Itaú Unibanco.

Itaú, headed by veteran banker Roberto
Setúbal, had not tendered a formal bid for Citizens when
LatinFinance went to press and had denied media reports that
one was in the offing. But market sources have identified no
fewer than three likely US targets for the southern
hemisphere’s leading financial group. If the
Citizens deal fails, they say, Itaú will look to buy one
of two other regional lenders: Boston-headquartered Sovereign
Bank, owned by Spain’s Grupo Santander; or San
Francisco-based Bank of the West, controlled by
France’s BNP Paribas.

New world order

Yet even if none of the deals goes ahead, and Itaú
looks elsewhere (or internally) for growth, the mere fact that
Latin American banks now play the role of the hunter rather
than the hunted – as would have been the case decades
past – shows how much the world has changed.

Latin American commercial and investment banks, including
Brazilian names Itaú and São Paulo-based BTG
Pactual, are on the lookout for assets both at home and
overseas. Others, including Banco Bradesco and Banco de Brasil,
are growing fast. At the same time, once-peripheral regional
groups such as Davivienda and Grupo de Inversiones Suramericana
(Grupo Sura), both based in Colombia, are snapping up valuable
assets shed by European lenders as they retreat – some
piecemeal, some aggressively – from the region.

The latter theme is part of a wider process of deleveraging
where western banks in general, and European lenders
specifically, have quit markets once deemed vital to future
growth prospects.

Across central and eastern Europe, central Asia and Russia,
and the Pacific Rim from Japan through to Australia, European
lenders are selling assets or shutting up shop.

Capital earned through equity sales, or repatriated by
cancelling or trimming credit lines, is being sequestered back
home to comply with new regulations (Basel III rules demand
Tier-1 capital levels of at least 9%) or to kowtow to local
political pressure (RBS, along with other UK lenders, is under
pressure to boost lending to British enterprises).

Wherever it happens, the effects of deleveraging are felt in
different ways. In Asia, European banks are retreating
reluctantly but en masse, allowing Asian lenders to regain lost
territory. In central and eastern Europe, a region that relies
far too heavily on western Europe for funding, the pain of
deleveraging is felt more keenly.

Napoleonic retreat?

Across Latin America the picture is far more nuanced. In
some cases European banks, facing problems at home, have simply
cut and run. RBS exited its Brazil operations in 2011 as part,
a bank spokesman insisted, "of our refocus of our Latin America
business strategy". 'Refocus’ is in this context
merely a Napoleonic retreat in disguise: RBS has also
'refocused’ its attention away from a host of
other countries, abandoning the likes of Chile, Venezuela,
Colombia, and Argentina.

That any bank would want to exit the world’s
25th, 28th, 34th, and 43rd largest economies, along with
Brazil, number seven on the list of world’s
largest industrial nations, all in less than a year, highlights
the challenges facing Europe’s lenders.

Others are departing, too. In September 2011, Davivienda,
which had operations outside Colombia in Panama and Miami, paid
$801 million to buy HSBC’s units in Costa Rica, El
Salvador and Honduras, gaining $4.3 billion in assets and $2.3
billion in loans. Three months later, Grupo Sura finalized a
deal to buy the Latin American interests of the
Netherlands’ ING.

Even the biggest European operators in the region –
Spanish groups Santander and BBVA – are allowing their
empires to get nibbled away. In 2011, Santander, casting around
for money, opted to sell its underperforming Colombia
operations, which controlled just 3% of the local market.
Executive chairman Emilio Botín concluded the sale,
which allowed Santander to pocket a handy $1.225 billion, with
the words: "Our market share in retail banking in Colombia was
a long way from the 10% we aim to have in the markets in which
we are present."

BBVA also has problems of its own. In May 2012,
Spain’s second-largest bank by market value
revealed that it was selling its pension fund management
operations in Chile, Colombia, Mexico and Peru as it focuses on
its "core" banking operations.

"Many of the large European financial groups are in the
process of reducing their size and investment in the region,"
Ignacio Calle, Grupo Sura’s chief financial
officer, says in an interview with LatinFinance. This retreat
has been forced on European lenders, Calle says, not by a
lowering of their expectations across the region, or by poor
investments, but because "some of them have been forced by
their European regulators to decrease investment".

It’s hard to argue against this point. European
banks, increasingly pushed back inside their natural cultural
borders by a welter of new legislation, are being forced to
find all manner of ways to rationalize their piecemeal
pullbacks.

Trimming the fat

Yet remove the solemn words and political spin, and all
these divestments amount to the same thing: troubled old-world
European lenders, short of capital at home, seeking to cut out
some of the fat in a few, faraway markets (while raising a bit
of handy cash) without being forced to hack off an entire
limb.

"European banks are not yet selling off big core businesses
[in the region]," says Cate Ambrose, president of the Latin
American Private Equity & Venture Capital Association
(LAVCA). "Until now, they have seemed content to sell off
'non-core’ business, including pension funds,
insurance businesses, and other assets."

One wonders how long that can continue. Five foreign lenders
boast a sizeable regional presence. Citi is well established
and highly profitable, particularly in Mexico, while
Canada’s Scotiabank continues to buy around the
region: last year it bought a 51% stake in
Colombia’s Banco Colpatria for $1 billion.

It is the other three – HSBC, BBVA and Santander
– that some analysts suggest are most likely to shed
more assets. The latter two names in particular, are those most
heavily invested in the region, and therefore the ones with
most to win (in terms of short-term gains through asset fire
sales) and lose (through the loss of regular returning income)
were either to seriously consider leaving the region.

To take Santander as an example: Latin America represents
19% of the Spanish group’s assets, earning 65% of
attributed revenues, against just 27% from continental Europe.
And there is no doubt that, as LAVCA’s Ambrose
puts it, some Spanish banks are "hurting" on the home front
(See: 'A rock and a hard place’, page 18).

A Santander spokesperson says the bank’s
position in the region is unshakable, noting: "Santander will
be increasingly present in the region. We want to grow in Latin
America, and we are going to. That means that we are focused on
growing and not selling."

And Santander has charted a nifty course during the past few
years, obviating the need to raise huge amounts of capital
through asset sales, thanks to the timely and profitable $9
billion initial public offering of its Brazilian operations, in
2009. The Spanish group is considering pulling the same trick
twice, through a flotation of its Mexican operations.

Of course, IPO cash doesn’t last forever. And
if push came to shove, some European banks may not have much
choice: the decision to sell core assets might come to be a
no-brainer for a struggling bank.

Huge appeal

Latin American financial assets are still wildly popular,
and many investors are prepared, at least in the current
climate, to pay over the odds to get a piece of the action.
"Most banking assets are selling at one times book value around
the world, and that is if you’re lucky," says
Marcos Brujis, chief investment officer at IFC Asset Management
Company in Washington, a division of the private-sector arm of
the World Bank.

"You can get very good valuations now for Latin American
assets, with book valuations up to two times, three times. This
might make global banks think again about selling Latin
American assets while they can."

Such sales are proving popular, particularly among local
players. Grupo Sura has ruled itself out of the running with
regard to BBVA’s assets: Calle says his bank,
which has more than 50% of the pension funds business in Chile,
Colombia, Mexico and Peru, would face anti-trust actions if it
pursued that deal.

But the Colombian group’s ING buy is unlikely
to be its last. "The exit of European financial groups is being
substituted by financial groups from Latin America and North
America," says Calle, who notes that Grupo Sura remains
"watchful for new opportunities that come our way",
particularly in financial services, insurance, social security,
savings, and investments.

The process of regional asset stripping, once it starts, is
often hard to stop. Once one big deal happens, another two or
three are expected every quarter, with ascribed valuations
rising to the point where a deal is virtually forced onto the
market by financial necessity. European lenders remain under
almost overwhelming pressure to raise capital to boost lending
in markets that are, in the case of Spain or Portugal,
themselves virtually bankrupt.

This has brought yet more investors and capital to a region
that, until a decade ago, was still regarded as a basket case.
Now, it’s widely seen as an emerging-markets
success story, despite a mounting economic slowdown, especially
in Brazil. Latin America has become a region dotted with
western banks pondering sales of their high-value assets at a
reasonable price.

Itching for a sale

The buyers are lining up, from foreign investment banks and
regional banking giants to private equity firms, eyeing a rare
good deal.

Even the Chinese have made it here, thanks to Industrial and
Commercial Bank of China’s $600 million deal last
year to buy the Argentine operations of South
Africa’s Standard Bank.

"The big picture here is that there is a huge amount of
capital looking for deals in Latin America," says
LAVCA’s Ambrose. "The chance to acquire a big
group of assets from a European or a US strategic player in the
region is a big attractive opportunity, and I would expect to
see more deals on the table in the future."

For sure, not all is doom and gloom for western lenders in
Latin America. The region remains a highly profitable market,
including for the likes of Citi, which is particularly strong
in Mexico. Scotiabank’s October 2011 Colombia
acquisition was its 20th across the region in the past six
years; it now operates in 13 countries around the region, with
820 branches.

Others, including the occasional European name, continue to
buy in judiciously. UBS invested just over $500 million in
Grupo Sura shortly before the Medellín-based
bank’s ING acquisition, to help boost the
latter’s numbers.

The baseline figures for the region aren’t all
bad, either. In a survey on emerging market bank lending, the
Institute of International Finance (IIF), which represents the
world’s largest banks, noted that "strong demand"
for credit in Latin America continued to rise. In other words,
European bank retrenchment isn’t, at least
superficially, crimping the ability to raise capital across the
region.

That school of thought is backed by recent data from the
Bank for International Settlements (BIS). In the first three
months of 2012, cross-border claims by UK banks in Latin
America were $161 billion, up from $151 billion in the last
three months of 2011, and the first rise in three quarters.

Spanish lending into the region was also up over this
period, rising to $480 billion, according to the BIS, again the
first substantial rise in three quarters, while claims by
international banks rose above $1.2 trillion for the first time
in nearly a year.

"I would certainly caution European banks against
unloading their Latin assets in any across-the-board
fashion"
Charles Dallara, IIF

This may to some extent temper fears voiced by many, including
LAVCA’s Ambrose, that the eurozone crisis would
lead to a vast withdrawal of liquidity. "There has been a fear
across the region, as the European crisis has unfolded, that
the likes of a Santander or a BBVA would repatriate or suck a
lot of its capital out of these markets," she says.

But others note that the full impact of private sector
deleveraging is only just beginning to be felt. IIF chairman
Charles Dallara tells LatinFinance that the twin impact of the
eurozone crisis and tighter regulation in Europe has "clearly
accelerated the process of deleveraging" across emerging
markets, including in Latin America.

Western banks have so far avoided making big asset sales in
the region unless it became absolutely necessary. Throughout
the financial crisis, Latin America has remained a vital source
of recurring revenues to the West’s ailing
lenders.

But much will depend on how the eurozone crisis unfolds.
Some believe that European banks are past the worst. "European
banks have so far avoided selling the crown jewels," says the
IFC’s Brujis. "Unless there is a total disaster in
Europe, you’re unlikely to see big asset sales by
European banks in Latin America."

If true, that would be good news for the stability of Latin
America’s banking industry, which has benefited
enormously from European technology over the past two decades,
and for increasingly credit-hungry Latin American corporates,
whose fortunes have waxed over the past half-decade as the
West’s have waned.

But not all are so confident in the ability of European
policymakers to avoid a spiralling of their financial crisis.
The IIF’s Dallara, who has had a prominent role
representing private creditors throughout the crisis, says:
"What worries me most is that the efforts to solve the problems
in a fundamental sense are still not coming together." The
result, he says, is a scenario that risks leaving Europe "in a
quagmire of recession."

"The rather mild relief we’ve been given in
global markets over the last few weeks is likely to disappear
fairly soon," Dallara warns.

Still, he cautions against any hasty moves by lenders. "I
would certainly caution European banks against unloading their
Latin assets in any across-the-board fashion," he says. "Over
the next decade or two those institutions that have positioned
themselves well to compete in the local markets are going to
find those positions pay substantial dividends.
I’m rather convinced of that."

Yet Europe, however you cut the facts, is on the retreat.
The Reconquista has been reversed in Latin
America’s favor. And as European banks straggle
home, it’s the local banking groups that are
swooping in to pick up the pieces. LF

Additional reporting by Taimur Ahmad

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